A dry lawn is bad, but a lawn that is too moist can be just as bad. The grass should spring back to life when you walk across it, not sink under your feet. If your lawn feels wet even after the morning dew has dried, chances are you are overwatering it.
If your lawn is severely overwatered or has been allowed to stay damp for too long, you may even see mushrooms start to sprout. Whether these lawn mushrooms are tiny or huge, you can bet they are not of the gourmet variety. You are trying to grow a lawn, not a mushroom farm, so do your grass a favor and cut back on the water.